The State of the City? We're Broke.

In 1991, in the midst of the last true nationwide recession, Mayor Don Fraser warned of "belt-tightening" ahead in his annual budget address. Fraser oversaw a city that was then around half a billion dollars in debt for bonding projects. At the same time, Minneapolis's cash expenditures were consistently exceeding its revenues, by as much as $84 million in 1991. By the time Fraser left office in 1993, the debt had grown to $726 million.

But those numbers would soon seem modest. After Fraser, the debt spun out of control. City leaders began balancing the books through a combination of bonded debt and debt-shifting maneuvers that were the equivalent of paying off a MasterCard with a Visa. Led by then-mayor Sharon Sayles Belton and a city council obsessed with big development projects, the city plunged ahead. In 1995, Minneapolis spent $132 million more than it made. It didn't stop there. By the time Sayles Belton left office, in 2001, the city's debt was approximately $1.5 billion, and Minneapolis paid $137 million in debt service that year.

From 1990 to 2001, there wasn't a single year in which the city's expenditures didn't exceed its revenues. (The city's 2002 financial statement is not yet available.) The year the budget came closest to being balanced, at the height of boomtime in 1997, the city spent $427.7 million and took in $427.4 million. All told, in those 12 years the city spent $644.7 million more--not including debt--than it took in. And the amount of its total indebtedness--between $1.1 billion and $1.5 billion, depending on how you count--more than doubled.

"Bingo," says former council member Steve Minn, explaining that accumulating expenditures are the reason for the city's economic duress. "There are accounting loopholes, but that's really what you have to look at. At the end of the day, running a city is no different than running a checkbook."

That is not exactly true. Running a city is like simultaneously running a great many checkbooks that are all supposed to reconcile when added together. There is enormous potential for creative accounting. Minneapolis, for example, has various departments and funds that operate individually; to make the bottom line come out right, the city relies heavily on "intergovernmental transfers" from various sources to prop up the general fund, while particular departments, such as the fund for insuring city employees, are allowed to dip into the red.

Minn, who left the city council in 1999, says he tried repeatedly to warn of his colleagues' spendthrift ways. "The debt service incrementally rose, and I was saying, 'We have to stop this and be responsible,'" Minn recalls. "It's an evil process."

Ken Kriz, who teaches public finance at the University of Nebraska-Omaha and consulted for the city when he taught at the University of Minnesota's Humphrey Institute from 2000 to 2002, is more reluctant to place blame. "The previous administration was not necessarily irresponsible, because the way local governments account has a lot to do with fund transfers from year to year," Kriz says. "The trouble was, they didn't plan for the worst-case scenario. I don't think anyone on a state, county, or local level saw revenues disappearing so quickly."

Kriz contends that aside from being dependent on LGA, the city has been far too reliant on "unstable" sources of revenue, such as licensing, permits, and inspections. "In a bad economy," he says, "those revenues go down, because there's not as much construction, building, money for sewer hook-ups, and things like that." From 1992 to 2001, the city's revenues for licenses and permits grew from $9 million to $20 million--a trend that's not likely to continue, Kriz says, in a sour economy. But LGA cuts are still the immediate back-breaker: Minneapolis currently gets almost half of its $260 million operating budget from the state. (Other cities are less dependent, notes Kriz: Omaha, for example, receives only four percent of its general funding from the state of Nebraska.)

Both Minn and Kriz complain that Minneapolis has badly mismanaged its Internal Services Funds, which provides money for insuring city employees, paying for "equipment services" such as computer upgrades and police cars, and maintaining a fleet of fire department and construction vehicles. "The critical moment for that fund was in 1995, when we needed to buy new squad cars," Minn recalls. "We needed a new fleet, and that was fine. I wanted to spend cash on it. But the council wanted to pay for it by bonding, and that's what they did."

The reason, Kriz figures, is that the city wanted to balance its general fund (which pays for everything from police services to public works), and spending money out of pocket to buy the new fleet would have made that impossible. So once again a bond issue disguised a budget problem by deferring it to another day. "They acquired debt there so the general revenue fund wouldn't go down, and they could hold down property taxes," he says. "The internal fund became kind of a disaster, but it saved the general fund for years. And it essentially enabled the mayor to not increase property taxes."

But running the Internal Services Funds into the ground came at a price. Toward the end of Sayles Belton's final term, Moody's (one of three bond houses that give credit ratings to cities) downgraded Minneapolis's long-standing perfect rating of AAA down to Aa1. The result? An increase in the interest the city has to pay on its bonds. If the city had a 20-year, $100 million bond, for example, the increased interest would be around half a million dollars, which could quickly add up for a city with bond debt of more than a billion dollars.